The dictionary offers several synonyms for the word "disaffirmation," including: contradiction, disclaimer, negation, rejection – however, none of these seems to fit the topic I'm about to discuss as well as…disaffirmation.
This word is defined as "a refusal to grant the truth of a statement." Or, to put it more colloquially, “They just don’t get it.”
Just who is in the act of disaffirmation, and about what? When it comes to the European Union's economic current conditions, my list is long:
- Anyone who has to be explained that the prospects for the Eurozone growth are not what they were just last quarter.
- Anyone who thinks that the Eurozone economy will be insulated from the credit crunch, which has frozen capital markets in the U.S.
- Anyone who thinks that curbing oil speculators and increasing taxes for oil corporations will produce more oil and substantially reduce energy costs over the balance of the year.
- Anyone who thinks that, at worst, only the highly leveraged economies like Spain or Ireland will suffer.
- Anyone who thinks that Germany's all-important Ifo Business Climate Index will not move below 90.
- Anyone who thinks they really can imagine just how bad a European recession can be.
Anyone on this list is fully engaged in disaffirmation.
It’s bad already. And it’s getting worse. Still, there are many who just don’t – or won’t – get it. The latter group is usually filled with politicians, too engaged in denial to fully grasp the fiscal and deflationary implications of this credit crisis.
The European Central Bank left interest rates unchanged on August 7. Some believe it's bearish for European stocks. Get an Elliott wave point of view now.
In aggregate, the Euro zone's exposure to direct loan revisions was not as extensive as it was in the U.S., but the virus of decelerating economic growth is inescapable and inevitable. Real and paper assets are devaluing, and we are nowhere near the bottom of this cycle (despite the claims of those who "don't get it").
As credit becomes even harder to obtain, the sale of assets will become the primary source of capital – and cash will become king. (Something that Bob Prechter, EWI's president, predicted as early as 2002 in his "Conquer the Crash" -- Ed.)
For now, the European Central Bank has the confidence of most governments in the European Union. But as growth turns to recession and job losses increase, the ECB will be up against it from both the markets and various governments. Ironically, when the politicians finally do get it, we will likely be near the bottom.
Anyone who can’t see all this is engaged in – disaffirmation.
EWI's Stocks Specialty Service Europe keeps you informed of the ongoing trends. Details.
Bill Fox is EWI's Senior Bonds Analyst. He has been involved in the markets since graduating in 1988 from Vanderbilt University. He joined EWI in 1994; most of his subscribers are professional bond traders.